Non-Fungible Tokens

Non-Fungible Tokens and Crypto Collectibles

Nicoleta Balan Avatar
Nov 7, 2022
15 min reading time

Nowadays, it is clearer than ever – Cryptocurrency is not just virtual money. Just look at the hype surrounding the NFTs (Non-Fungible Tokens) and crypto collectibles. 

10 Bitcoins are equal to 10 Bitcoins. Right? How does it come that 10 NFTs are not equal to 10 NFTs?  

And what is this NFT and collectibles stuff about? What does it have to do with the crypto world? 

Let us find out. 

Keep in mind that this is not an advertorial for a comic shop or some premium skins in some game. So, there is no link for a loot box with a 0.02% chance to get some premium item.  

Yet, we will see that the unique assets that non-fungible tokens allow to create are highly important for the future of distributed ledger technology. 

Non-fungible vs fungible

Fungible… Fungi… Mushrooms? 

Actually no! Fungible/fungibility is a term that expresses the property of an item whose individual units are interchangeable and indistinguishable from one another. The term comes from the Latin verb fungī, meaning “to perform,” and is not related to the Latin and English noun fungus or its plural, “fungi” (which means mushrooms). 

In a few words, when a thing is fungible, it is the same as another thing from the same category. When a thing is non-fungible, 2 things are different even if they are from the same category. Two bricks can be the same, but my house is certainly different from your house, even if they are both houses. 

We meet with the propriety of fungibility in finances when describing fiat money. For our economy to work, all currency units must be interchangeable for the same value. My 1-dollar bill is the same as your 1-dollar bill.

In the creation of Bitcoin and other cryptocurrencies, the developers kept the fungibility property to indicate the possible use of crypto coins and tokens as a new and more reliable financial system for the exchange of goods and services. 

SIDENOTE. Some say Bitcoin is not fungible because it can be traced back and checked for what it was used for. For example, if a coin was used in illicit transactions, people are going to avoid buying it, thus making it useless. Although it is true, Bitcoin is considered a fungible coin because every coin was created to be the same as the other.

Tokens usually revolve around an ecosystem, usually a decentralized application, in which they are meant to be used for various processes and transactions. Those tokens are all fungible. 

However, the power of tokens can be applied to represent even real-life assets or digital items from a game. While the ownership and the proprieties of the digital assets are stored on a blockchain, the owner can always control his asset just by holding a unique token.

And because the non-fungible token describes a specific asset, it will be different from any other NFT, even when they serve the same purpose.

What are non-fungible tokens?

A non-fungible token (NFT) is a cryptocurrency token used to create a unique asset.

Unique assets can refer to works of art, ownership titles, identification, and of course collectibles. With NFTs, all kinds of real-world and digital assets can be registered in a blockchain, so all details about who owns what is safely stored and immutable.

All NFTs have 4 core characteristics: 

  1. They cannot be replicated.
  2. They cannot be counterfeited.
  3. They cannot be printed on demand.
  4. They have the same ownership rights and permanence guarantees as Bitcoin.

Through these characteristics, non-fungible tokens can be used to identify unique items and limited-edition products. Nobody can counterfeit a product associated with an NFT, and nobody can claim ownership of such an item even if they stole it. 

Imagine someone is trying to sell you a limited-edition Porsche car. With NFT, you can easily check if the car is registered in the limited edition smart contract and if the seller is the rightful owner. If the car does not correspond to the NFT, you know it is a fake. If the car is legit, but the NFT says someone else is the owner, you find out immediately it was stolen and get out of a complicated situation.

And that’s exactly how it works for NFTs such as CryptoPunks.

Is there a need for NFT?

Of course, there is! You may not live in an ex-communist country, but you surely heard at least once of nationalization. 

Although the government is the one protecting your rights, across history, we notice that the rulers did sometimes confiscate properties from their citizens just because they could. And once the situation changed, in one or more generations, it was nearly impossible to prove who was the rightful owner. 

These days, the government is less likely to take the initiative in confiscating stuff from its citizens. However, we still hear of nasty gangs stealing and modifying papers to expand their wealth at the expense of regular citizens.

However, we see governmental institutions investing in security to improve the safety of their centralized ledgers. But an event like the one in Haiti in 2010 shows us that it is still not enough. 

SIDENOTE. In 2010, an earthquake devastated Haiti and destroyed the municipal buildings containing documents regarding land ownership. After the destruction, citizens had to reclaim their land with no proof of ownership, and the rebuilding became complicated.

Going inside the digital world, we discover that the definition of ownership has changed drastically. Thanks to the internet, you can watch movies, get the software, and play video games without going out to a store to buy a CD or a DVD.  

However, if you have ever used Netflix, you already know that you cannot close your account and just take all the movies to move to Amazon Prime.  

And if you ever used Steam, you may have realized that by requiring you to be logged in, you are actually at the mercy of an external middleman to play the games and use the software you paid for with your own money.  

ERC721 and ERC1155

Although the EOS platform can be used for the creation of NFTs, the most commonly used smart contract is ERC721 from Ethereum. If ERC20 comes with a token that is valued the same as the next one, ERC721 introduces tokens that are indivisible and unique. 

Tokens deployed through ERC721 cannot replace each other even when they are from the same class. Most of the time, a token has different characteristics from another one, and because of that, they have different values, making them non-fungible. 

Nowadays, the most common use of ERC721 and NFTs are in games for deploying unique items known as crypto collectibles. 

However, the limitation that ERC721 comes with is that it can only deploy one category of tokens at a time. So, if you have to deploy more classes of unique items or even need an in-game currency system, you might have to use a few more smart contracts and even an ERC20.  

That, of course, expands the usage of gas and may even come with background issues like difficulties of communication between ERC721 and ERC20. 

ERC1155 solves this issue by proposing a standard where a single contract acts as an interface for multiple types of tokens, such as fungible, semi-fungible, and non-fungible. 

SIDENOTE. Keep in mind that Ethereum is currently the most popular platform for NFT. However, as the DeFi rose, more and more ecosystems became promising for non-fungible tokens, and we will address them as they evolve.

What are crypto collectibles?

Crypto collectibles are digital collectibles based on blockchain as non-fungible tokens. Like in the case of every other token, at their foundation stands a smart contract. The smart contracts allow the crypto-collectibles to be bought, sold, and traded with a relative value influenced by rarity and demand.  

As a matter of fact, a whole sub-industry has formed around these crypto collectibles that evolved beyond peer-to-peer trading into marketplaces where anyone can sell and buy them. 

Once you buy a crypto collectible, you can either hold it in your Metamask or put it in a wallet that supports NFTs. But keep in mind that it is quite expensive to send a crypto collectible because it holds more data than a typical transaction. 

SIDENOTE. Metamask – browser extension allows you to run Ethereum dApps right in your browser.

Apart from being used as a store of value and for trading, crypto-collectibles are largely used in the creation of crypto games. 

Does CryptoKitties sound familiar to you? 

CriptoKitties is the most known crypto game that involves crypto collectibles. 

CryptoKitties is a game built on the Ethereum blockchain in which the players buy, breed, and sell unique cats with different traits. Some traits and configurations are rarer than others making the collectible more valuable. And if you are wondering how valuable, imagine that the most expensive CryptoKitty was sold for 600 ETH (approximately $170,000 at that time).

How is this possible? It is simply because the world likes to collect rare objects. People collect postage stamps, old withdrawn banknotes, baseball cards, and lots of things that might look like junk but sell for considerable amounts of money. 

Top crypto collectibles

CryptoKitties in CryptoKitties

CryptoKitties is the most popular crypto game built on top of the Ethereum blockchain, which makes use of crypto collectibles. It has the highest all-time volume of $36,557,745.64, and besides the base game, it also offers lots of games and experiences built on top of the platform. 

Land in Decentraland

Decentraland is the second most popular crypto game with an all-time volume of $21,772,371.07. Also, it is listed on CMC as the 4th top NFT by market cap.

This game is a virtual reality hosted on the Ethereum blockchain in which users can own Land as crypto-collectibles and create, experience, and monetize content and applications. 

The main selling point is the idea of permanently owning a LAND in virtual reality and having entire control over it. The community members control the published content on their portions of land, which is identified by a set of cartesian coordinates (x,y). 

Heroes and items in MyCryptoHeroes

MyCryptoHeroes is the third most popular crypto game with an all-time volume of $4,401,045.14. It is an RPG-style game based on the Ethereum Blockchain. The game has quick battle cycles and gameplay that involves creating teams of heroes. MyCryptoHeroes uses ERC721 tokens to create crypto collectibles in the form of Uncommon Heroes and Original Extension unique items. 

The NFT bull run and the CryptoPunks

As we all know, the cryptocurrency market started 2021 with a bull run. Almost every crypto project saw astonishing returns. 

With the energy that came with the NFTs markets through DEX and DeFi projects such as Uniswap, PancakeSwap, and 1inch, the non-fungible tokens became once again the hottest topic. 

And most of the popular ones are not even new. 

But the initiative that came from DeFi platforms may unleash the full potential of the NFT market—especially considering the use of non-fungible tokens in creating platform ownership rights and governance systems. 

The CryptoPunks

CryptoPunks is one of the first NFTs that came out. They came out in early 2018, even before CryptoKitties. 

The CryptoPunks is a collection of 10,000 unique collectible characters designed as 24×24-pixel art, registered on the Ethereum blockchain, and are the inspiration for the ERC-721 smart contract. 

At first glance, they may seem unremarkable. However, CryptoPunks captures the essence of the crypto art evolution. It started around a few hundred dollars per piece, and the community started valuing it further and further to the point where they sell at $50,000 on average. 

But besides 24×24-pixel art, nowadays, we see a flood of complex art in the NFT market. Some works are extraordinary, and some are not worth mentioning. 

The Bored Apes Yacht Club story 

Yuga Labs is known for bringing new and improved ways of encouraging engagement and developing a sustainable NFT environment. And some part of Yuga Labs’ success can be credited to the company’s choice to create a community-focused framework for administering the Bored Apes Yacht Club (BAYC) NFT collection.  

BAYC is one of Yuga Labs’ projects, that consists of 10,000 ape-themed NFTs with diverse qualities and unique properties. BAYC, like most PFP-based NFTs, was inspired by CryptoPunks, the first of several NFT initiatives aimed at developing a library of characters with distinct features and rarity levels.  

SIDENOTE. PFP based NFTs is the representation of users on the internet and its stands for profile picture. 

Yuga extended the notion of PFP-based NFTs to the point where owners of Bored Apes instantly become members of an exclusive club with benefits ranging from early access to new products to buying commercial usage rights to acquired Bored Apes.  

The main concept behind the Bored Apes Yacht Club is centered around the idea that these wealthy but bored people join an exclusive club and hang out in a bar in the distant future. 

Following the success of the BAYC, Yuga Labs moved on to develop a blueprint for prompting long-term loyalty and prestige among its members. In less than a year, the company introduced new means to reward its members, forming the BAKC – Bored Ape Kennel Club. BAKC consists of a one-of-a-kind collection of digital dogs bred as companions to the BAYC. Additionally, Yuga Labs has also rolled out Mutant Ape Yacht Club – MAYC, known as the mutant or zombified Bored Apes collection. 

The NFT market and the gaming industry

The NFTs bring decentralization to the gaming industry as well.  

If you ever invested a lot of time, energy, and possibly money into a game to reach a level, a status, and obtain some cool equipment, you know the frustration that comes when the game’s company reminds you who is actually the boss. 

Online games shut down, get updates that nerf certain skills or equipment, or just get boring. 

Blockchain-based games allow players to have permanent ownership and full control over their in-game assets with the help of non-fungible tokens. Whether it is an in-game card, skin, equipment, or character, the player is free to use however he wants and is ensured that nobody can change or nerf an owned asset. 

Also, NFTs can allow you to take all your crypto-collectibles out of a game you have played for a while and move to another connected game inside the same blockchain. So, you will not have any problem if a server gets closed or you just want to try something different. 

Right now, you can take your unique CryptoKitty and use it in games built inside the KittyVerse ecosystem. 

Imagine what it would be like to take your World of Warcraft character for a ride into an Overwatch match. 

Fractional NFTs – what does it mean 

The notion of NFT fractionalization is not entirely new, but it does introduce a spectacular concept within the NFT niche. 

With a fractional NFT, the ownership of a one-of-a-kind item, such as digital artwork or collectibles, is shared with several co-owners.  

The owner of the collection may issue a number of tokens that are part of the original NFT and distribute them to interested parties. Consequently, an expensive NFT will be much easier to sell as little fragments, which may lead to an influx of liquidity within the space. 

However, fractionalization has both positive and negative consequences.  

First, on the positive side, it will be much easier to determine the value of the artwork. It improves the market’s liquidity and has the power to democratize investing and enable easy monetization. This way, NFTs open up to investors with limited funds and the integration of DeFi, which means staking, yield farming, and dexes are all available for integration.  

On the other hand, when it comes to fractionalization, the reconstitution of the piece may have some problems. Even if you own 50% of an NFT, you may still get into a situation where you cannot enjoy the utility that the full NFT might offer.  

The token can be quite volatile, and there is also the risk of unwanted buyouts. 

Key takeaways

  • Fungibility is the property that describes an object as originally the same value and with the same characteristics as another object from the same class. Non-fungibility is the property of an object to not being replaceable with another object from the same class because of its unique characteristics. 
  • A non-fungible token (NFT) is a cryptocurrency token used to create a unique asset. Unique assets can refer to works of art, ownership titles, identification, or collectibles. 
  • The most commonly used smart contract standard for deploying NFTs is ERC721. However, ERC1155 comes as an improvement that allows the creation of multiple classes of tokens from the same contract, even if they are non-fungible, semi-fungible, or fungible. 
  • Crypto collectibles are digital collectibles based on blockchain as non-fungible tokens. The most popular crypto collectibles are CryptoKitties. 
  • NFTs can bring decentralization to the gaming industry and allow players to take full ownership of their in-game assets regardless of the state of the gaming server. 
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